Any investor or trader that has traded stocks for a few years has seen up, down, and sideways markets. If you are new to the market, pull up a chart of the S&P 500 chart for the last 5 years. You will notice the market has trends that go up, down, and sideways. Most traders and investors will tell you never to fight the trend but rather ride it instead. So, how do you trade or invest during each of the trends?
Trading An Up Trend
In an uptrend, many stocks will follow the market although they are not worthy of their price action. I am a big fan of leveraged ETFs for short-term trades and hedging positions (place stop orders when using leveraged ETFs.) In an upward trending market, invest in or trade companies/sectors that expect to have rapid growth. This is where I have the most success and profits. Anyone that took a deep look into Google (GOOG) slowly taking over the internet could have easily bought the stock under $150 then rode it up to $600 if not higher. Growth stocks in an upward trending market produce huge gains; sometimes, returning two, three, or four times your initial investment. If you do not want to do the research on individual companies, take an easy approach and invest in a leveraged ETF like the ProShares Ultra S&P500 ETF (SSO) or ProShares Ultra QQQ (QLD).
Trading A Down Trend
Get short or go to cash. The recent drop from all time highs in the DOW cost investor roughly 50% depending on allocations. Many income investors that I spoke with were heavily into financials because of their yields. Needless to say, some of their positions lost more than 50%. Having stop orders in prevents losses of this magnitude. When markets are trending lower, move to the sidelines (move to cash positions) and/or pick up some short positions in companies with the weakest balance sheets. I prefer to trade Ultra Short S&P 500 (SDS) and leveraged short sector ETFs.
Trading A Sideways Market
Sideways markets are not as exciting but can bring nice profits. Sideways markets usually run in a channel having a point at which the stock gets up to a point where it can not move any further, this point (called resistance) is touched before dropping to another point (called support) at which the stock gets too cheap and starts moving back up towards resistance. The trade here is easy, buy at/near support and sell at/or near resistance repeatedly until there is a breakout of the channel.
The strategies listed above are not gaurneteed to make you money. They are just a few strategies that I use.
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